Integral Ad Science Holding Corp. (IAS) Earnings Call Transcript & Summary

Thank you, everyone, so much for being here. My name is Matt Cost from Morgan Stanley U.S. Internet team, joined today by Lisa Utzschneider and Tania Secor, the CEO and CFO of IAS. Thank you so much for being here with us.

Thanks, Matt, for having us.

So let me just quickly run through the disclosures. For important disclosures, please see the Morgan Stanley research disclosure site at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your MS sales representative.

All right. With that out of the way, maybe Lisa, I'll start with you. So just -- for those in the audience maybe who are newer to the IAS story, can you give us a quick overview of IAS, where you fit into the ad ecosystem, how the business has changed over the past few years? And we understand that you play primarily in a duopoly market. So we're often asked to help investors understand the puts and takes of your strategy given that.

Sure. Thanks again, Matt, for having us. IAS, we're a leading digital media quality company. And what I mean by that is we classify the quality of digital media that advertisers run their brands adjacent to. Our core customer base are the largest brands. So we have over 2,000 advertisers that we work with them -- work with. Many of them are Fortune 500 brands like Nestlé, Verizon, L'Oréal. And our product offering, there are 2 parts to it. There's a measurement side and an optimization side. When you take a look at the measurement, that's ensuring that we are able to verify that the ad was viewed, viewed by a human and not a bot, and then also that it ran adjacent to brand-safe and brand-suitable content. Optimization is more prebid programmatic that, again, advertisers who were able to set up prebid segments in all of those factors that I had mentioned before. And when you take a look at, from a macro perspective, where the brands and publishers are really leaning in, it's everything related to social and also optimization when it comes to efficiency.

Great. So maybe we'll talk about the ad markets for a second. So what are you seeing more broadly? Any areas of strength or weakness in the markets that you would call out? And then as you're having conversations with advertisers to start out the year as they're thinking through their priorities and budgets for '24, what are they focused on?

Sure. Similar to 2023, 2024 is the year of efficiency. Marketers, they deeply care about connecting with consumers across the entire digital ecosystem, but they want to make sure that every dollar that they invest in digital advertising, they're getting the best bang for their bucks. So they care about efficiency, they care about performance, and they deeply care about brand equity and brand reputation and protecting growth. And that's when our products have never been as relevant as they are today.

Got it. I guess I want to drill down for a second on pricing. So during the earnings call for the fourth quarter, you talked about the decision to offer more competitive pricing to retain some clients, and that was a driver of the guidance for 1Q being slower than maybe the market had expected. So maybe walk us through the strategic logic of taking that step on pricing, the puts and takes and why you think it will ultimately benefit the company.

Sure. So we always lead with product and the differentiation of our product. We see such value in the products that we offer our entire customer base, whether they be brands and publishers. We never lead with price. And what we spoke to on the earnings call, it was related to measurements. And these were our mature measurement products where we did see a pricing dynamic where we did reduce price for a handful of advertisers in exchange for higher volume commitments for the year. In addition to exchange of higher volume commitments, we were also able to secure extensions of the contracts, being able to lock in multiyear contracts and, with some of the advertisers, expanding from regional to geographic footprint. But I think the important point is measurement and also just on mature products. Another thing to note is that we continue to upcharge for our premium products. So as I mentioned, we invest in innovation and differentiation of products. And premium products, especially in measurement like Total Media Quality, we are able to classify high-quality media in the social platforms and able to charge and upcharge. And then one other comment is with these renewals, these renewed agreements, we will see and anticipate net revenue positive for the year. And that's been factored into our ramp Q4 through the remainder of the year.

Got it. That's a perfect segue to Tania, who I did not forget about. And so on that point about the ramp for revenue and profitability as you move through the year, talk to us about the key drivers of performance, including your upcoming product launches for the year that get you onto that ramp.

Sure. In 2024, the midpoint of our guidance is 13% revenue growth. We're really excited about 2024 being a robust year for new product launches, particularly as it relates to our social media offerings. We launched Meta -- TMQ in Meta earlier in February and excited about the ramp and acceleration of Meta growth through 2024. Now at the same time, we also have other new products that you've heard about on our prior earnings calls, whether it's continued advancement and adoption of QSP in our -- with our DSP partners, acceleration of Made for Advertising as well as our Attention offering. And then in the second half of the year, there's also events that are expected to drive some revenue for us in the second half like political advertising as well as the Olympics. And then we also have had a strong track record of launching and acquiring new customers. You heard about 3 customers on our last earnings call, and we expect new logos to ramp as we move through 2024.

And just to add to what Tania said in terms of the launch of TMQ in Meta. So we were thrilled to go GA with our Total Media Quality product. Again, that's our ability to leverage AI, ML and be able to classify the live streams of social platforms real time. We're running the product in the other 3 social platforms, including TikTok, YouTube and X, and launched GA TMQ in Meta in early February, and we're thrilled with the adoption we're seeing. And since that GA launch, we're actually seeing 50% year-over-year increase in volumes on Meta with the launch of TMQ in early February. Again, it just is a reflection of the value that we're driving for our customers and the differentiation of our products.

That's great. I mean maybe sticking with you, then, Lisa, when you think about just core execution, the areas where you feel you've made the most progress maybe in the past year. And then going forward, maybe 1 or 2 areas you'd call out where you feel like you have the most wood still to chop.

Yes. Happy to speak to that. So science is in the name of our company, and we are leaning heavily into all things related to data science and AI. 2 quarters ago, we announced a new Head of Data Science. His name is Kumaresh Singh. He came over from Meta. We've also shared that this year, we expect to land the year with 30% of our engineering team made up of data scientists. When you look at our robust product portfolio, whether it be TMQ or MFA, Made for Advertising segments, we actually announced today launching that GA, our Attention product, our products are backed by AI, ML. We are leveraging AL -- AI to ensure we're driving innovation, driving efficiency, and we have demonstrated in the past, by leveraging AI and OpenAI, an ability to accelerate our product road map, accelerate the release of products like TMQ on TikTok last year. And that enables us to bring the value to our advertising customers even sooner and drive growth for the company. So stay tuned. There's just so much incredible work we're doing around AI. That just gives you sort of a snapshot of some of the products we're focused on.

Great. Maybe on the product side but also in terms of their ability to drive revenue, and I'll take this back to you, Tania. Can we talk a little bit about your core business offerings between programmatic verification and CTV? Which segment do you feel has the most runway from here? And then what are the key drivers that we should be focused on for each of them?

Yes. So in 2024, I'd ranked the 3 key drivers as measurement, optimization and CTV. So with measurement -- in that order. So with measurement, expecting growth in 2024, I think slightly above the midpoint of our guidance, really fueled by social and all the things I talked about before with the launch of Meta and TMQ. Secondly, on the optimization front, we've seen in 2023, for example, enhanced adoption of our QSP offering that tripled the number of impressions from the beginning of 2023 throughout 2023. And there's still more to come on QSP as well as continued growth of Context Control. And then on the CTV side, as you know, we bought Publica 2.5 years ago, really strong partnerships with our OEM partners, growing with those customers as the market grows -- CTV market grows. And we're expecting an increase in -- from low single digits to high single-digit growth in our publisher business.

Great. Maybe let's shift gears for a second and talk about clients, and I'll direct this one to you, Lisa. I mean it -- I think it would be helpful to talk about the life cycle of your clients, how you acquire them, how you see the relationship scale over time. And then what products and tools are you most excited or are your clients most excited about over the course of 2024?

Yes, sure, happy -- it's one of my favorite topics, talking about our customer base. So we were thrilled in our Q4 earnings call to announce 3 large wins: Airbnb, a large telco provider and a large insurance provider. And when you step back and take a look at why large advertisers are leaning into IAS and choosing IAS, it's for a couple of reasons. The -- and these specific advertisers chose us from direct competitor for these reasons. So first is the sophistication and differentiation of our product and tech road map. When you take a look at how advertisers are assessing us or our competitors, they want to understand the accuracy of the technology, the quality of the technology, the ability to scale the technology globally because many of our clients care about the global footprint. And in particular, they select us for our TMQ product that we're running, as I mentioned before, across the 4 major social platforms. In optimization, Total Visibility is a differentiated product that we offer where we're providing transparency of supply path optimization. And the third big differentiator from a product perspective is Publica in CTV, where everything that Publica brings to bear, both for publishers and marketers, is a differentiator. So it's our product and tech road map and the investments we're making, especially leveraging AI. Second big reason why advertisers are leaning into IAS is our international footprint. We have a sizable and larger footprint in the major regions, including EMEA and APAC. We continue to invest in emerging markets. We announced 4 new APAC markets on the Q4 earnings call. And especially for these Fortune 500 brands that want to extend our solutions across many markets with many brands, international footprint really matters. And then the third reason is service. Service is a big differentiator for IAS. We've been investing in service for over 18-plus months to ensure with these major marketers, especially in their Tier 1 markets, we are providing white glove service. So those are the 3 biggest reasons why advertisers are leaning in.

There's a lot in there, but you did mention social -- technical difficulties. There's a lot in there, but you did mention social. And it's such an important topic, I think, not only for your customers, but investors are very focused on it this year. So maybe actually, I'll direct this to both of you, and I'll let you slice it up as you see fit. But how are you quantifying the opportunity on Meta this year? It's a huge focus for investors. Obviously, a very exciting announcement earlier this year. And then what are you seeing so far in the rollout?

Great. Sure. So social media revenue in 2023 was 18% of our total revenue, so roughly $86 million. Across our social platforms, in the order of size, we've got Meta, YouTube and TikTok. Meta is our largest platform. As Lisa mentioned earlier, since launch of TMQ in Meta, Meta volumes are up 50%. And the way we look at the model, the opportunity for revenue from Meta as we move through 2024 is half of our social advertisers are clients on Meta. So there's an opportunity to expand with those existing clients on Meta as well as our other social advertisers who aren't spending on Meta, and they're really excited about TMQ.

Great. Maybe let's talk about the election. So how are you thinking about where IAS is positioned, heading into a very busy election year this year? And does that impact your conversations with advertisers?

Sure. So elections, the election season, it's not just U.S. elections. I mean there are major elections happening around the globe this year. But the election season in the U.S., in particular, is top of mind for the brands. And the reason why it's top of mind is they just want to make sure when they're running their branded advertising, it is running adjacent to high-quality media. We are very focused on partnering with the brands so that they can be comfortable running their advertising during elections. And we are launching misinformation segments, both in TikTok and Meta in H1 to get ahead of the election cycle so that, in addition to the other segments that advertisers are able to select saying, "I don't want my brands running adjacent to adult content, violent content, hate speech content. I don't want my brands running adjacent to misinformation." It's an area where our data science team, they are very focused on right now because it is a top request on behalf of the brands. And then in terms of political advertisers, we also see opportunity there, especially during the U.S. elections. But it's not -- I wouldn't call it or classify it as a sizable revenue opportunity, but we are leaning into that area, too.

Got it. Speaking of sizable revenue opportunities, CTV, very, very sizable, very top of mind for investors and advertisers as well, obviously. So tell us about some of the latest trends you're seeing in your CTV business. And what do you think it will -- what will need to change for CTV to become a larger go-to place for ad dollars in the near term and medium term?

Sure. I'd like to refer to CTV as the long game. It's a $25 billion business in 2024 for the broader marketplace. And CTV, when you talk to brands about what will it take to shift your linear TV dollars into CTV, they typically have 2 answers. They want greater transparency to understand where their ads are running in programmatic CTV, and they want frequency capping. They don't want -- they want a good user experience. I'm sure we've all experienced it on CTV. You get the same ad over and over again. I see all the heads nodding in the room. It's not necessarily the -- a right or relevant ad for you. So here comes Publica. We acquired Publica 2.5 years ago, leading CTV platform. And we are working closely, both with the publisher community and marketers to solve both of those problems. From a transparency perspective, we're able to leverage the rich data that we get. Again, this is differentiated from our competitors, but the rich data we get from the Publica platform, which has a unified ad auction; video ad server; real-time stitching of the creative in the stream of, for example, a Samsung; leverage that data; layer it on top of IAS' data to provide greater transparency for marketers so they can better understand where their ads are running. And secondly, with the frequency capping issue, the fact that Publica has SSAI stitching, we can stitch the creative real time, for example, in live stream running in Samsung. It's partnering with the publishers and addressing that frequency capping issue. But I think for the broader industry, those are the 2 primary issues that need to be addressed to see a more dramatic shift of linear TV into programmatic CTV.

Got it. Let's stick with Publica for one second because, I think, as you just articulated, it's such an important differentiator in what you have to offer. What is the go-to-market like for Publica? Is it an attach for existing customers? Is it an avenue to new customers? And is it a mind or a mental shift for them to, also on the supply side, work with you on the Publica side? Or is it sort of a natural extension?

Great question. It's both. So it's both cross-selling, upselling the existing OEMs and platform partnerships that we have in place. A good example is Samsung, which is a strategic platform for us. Two earnings ago, we talked about renewing that strategic partner. Also signing up new OEMs like Vizio. In addition to that, going after greenfields and identifying new OEMs and new publishers that we can partner with so that they integrate Publica into their broader platforms so that we can help them drive higher yields and higher optimization.

Great. Maybe go back to Tania. So let's talk about margins for a second. How are you thinking about the opportunity for leverage from here? And how should we think about OpEx discipline and the opportunity for margin expansion in 2024?

Yes. So 2024, the midpoint of our 2024 EBITDA guidance, we're forecasting a 33% EBITDA margin. We're always focused on profitable growth and balancing growth and profitability. So as we move throughout the year, we made some important investments last year from an OpEx perspective. And as we move throughout the year, we expect to ramp our EBITDA margins from Q1 midpoint of the guide of 26% through the year, being disciplined on costs, on operating costs, on compensation costs but also investing in the business in key areas like R&D, like data science as we move through the year. And with the revenue ramp that I talked about earlier, we're expecting leveraging our OpEx and expanding our EBITDA as we move through the year.

And those areas that you're prioritizing investment in, I guess, how do you think about the process of identifying them? How are you settling on the areas that we need to make sure we set capital and time and energy aside to focus on this area of investment? How do you go through that process?

In terms of capital allocation or just overall OpEx?

Yes, internally. I mean you were talking about areas of making sure you continue to invest in certain areas internally. How do you make those decisions about what to prioritize?

Yes. In terms of where we're investing, right, from a P&L perspective, right, we're looking at our gross margins, we're looking at the -- we've made some important investments last year in our data platform and driving, optimizing our cost of technology that factors into our gross margin but also making investments in our cost of technology to support our premium offering. So we look at that, very important in terms of driving ROI for advertisers. And then from an OpEx perspective, it's really maintaining discipline and making sure we're driving efficiencies and focus in the right areas. But of course, it's really important to be investing on the continued efforts around R&D and our go-to-market strategy to drive leverage as we move through the year.

Got it. Maybe Lisa, we'll move on to cookies, which is another very big topic, a more recent one maybe in the past 6 months or so, that's come under a lot of focus for investors as we anticipate perhaps the deprecation of cookies on Google Chrome at the end of this year, which would be something. As I recall, that conversation starting in like 2018 or '19. So we've been waiting a long time, but it seems like it's closer. So I guess, remind us how you're thinking about IAS' position, your use of 1P versus 3P data to the extent that you have exposure to both. And how do you partner across the ecosystem to help mitigate the impact of cookie deprecation for your customers?

Sure. Happy to take that. So with the cookie deprecation and the fact that it's finally becoming a reality by the end of 2024, when you think about IAS and our core solutions and offerings, we focus on the what and the where the ad ran. We don't focus on the who. And in many ways, cookie deprecation is a tailwind for our business as advertisers are looking for more sophisticated contextual solutions. So moving away from targeting based on consumer PII data and looking for opportunities where their brands can run and they can see higher performance but based on the contextual environment. So Context Control, which has been a big growth lever for our optimization revenue over the last few years, fits squarely in the middle of the bull's eye of contextual and advertisers leaning into contextual solutions. The one other thing I'll add -- and I know we spoke to this on our Investor and Analyst Day last week -- last year. We're also very focused on leveraging a real-time data platform. And that's an area where we've been investing in throughout last year in terms of being able to organize and catalog our data. We process a lot of data every day, billions and billions of web events as we process our measurement solutions. And marketers are interested with how can we leverage that data to help them find higher-quality media. Our data engineering team, they're heads down, and we're poised to launch a real-time data platform in 2024 for the benefit of our customers.

That's such an important point that customers might look to the services you provide even more as a result of what's happening with cookies. And I guess what -- how big of a focus do you get in the sense it is from your conversations with them? Because certainly, in conversations with investors, I've gotten the sense that there's a broad range of expectations about how big of a deal this is going to be. Are you seeing a lot of anxiety and focus from your advertiser customers, like we need to lean in with you in order to deal with this big issue? Or are they more sanguine about it and feel like they're going to be able to take it in stride?

Good question. Well, I think that for many of our marketers, they've been planning for cookie deprecation for quite some time. They have strategies in place. And like I said, they're leaning into more contextual solutions. In addition to that, they're leaning in, as I mentioned before, at a macro level, performance, efficiency. And our thesis is, if we can help advertisers find higher-quality media, it will lead to higher ROI. And we're already demonstrating that with some of the solutions that we're currently running. So with that, we'll just continue to innovate and innovate for differentiation and do whatever we can to ensure brands are running in brand-safe and brand-suitable environments.

Great. Maybe on the capital allocation front, and I'll split this up between the 2 of you. So obviously, IAS has been active in the M&A space over the past couple of years with Publica, Context. I guess, Lisa, do you have any updates on how those acquisitions have impacted IAS? And then, Tania, how are you thinking about capital allocation more broadly going forward from here? And how do you think about that versus core investment priorities?

Sure. So since I joined IAS over 5 years ago, we've made 4 acquisitions. Out of the 4 acquisitions, 3 were tech tuck-ins, and the fourth was Publica. And the way we view just M&A landscape in general is with the lens of build by partner. If there are opportunities, especially tech opportunities out there that are additive to our existing technology that can help us accelerate our product road map to drive even greater value for our customers, we definitely take a look at those acquisitions. And I'll give 2 quick examples. So when you -- I spoke to you before, Context Control. Context Control is powered by a contextual intelligence technology, a company that we bought, my first year at IAS, called ADmantX. We acquired the technology, integrated it into our tech stack, and we had a product out in market on The Trade Desk when COVID was just taking off. So when marketers were trying to figure out in the 24/7 news cycle of COVID how and where can I continue to connect with consumers and run our brands, we launched Context Control. And as I could say, the rest is history because Context Control makes up almost half of our optimization revenue. Second great example, I mean, I could keep going, but when you look at our Total Visibility product, again, a big differentiator for IAS, where we're providing visibility into supply path optimization, fitting squarely into advertisers' demand for greater performance and greater transparency. That has been a great acquisition, great technology, and Context fuels our Total Media Quality product, and we're able to provide more sophisticated multimedia classifications. So with all of that, I think we have a very positive track record of successfully finding the right acquisitions that are additive to our product and tech road map and accelerating either the technology or the product road map as a result.

And then, Tania, on capital allocation?

Yes. And we have a very strong balance sheet and a strong, healthy free cash flow. We ended 2023 with net debt of $30 million. Our primary focus is investing in the business. We have a large TAM ahead of us, and it's a growing TAM. So our primary focus is investing in the business, but we're constantly evaluating our capital allocation priorities to ensure the highest ROI for shareholders.

Maybe sticking on the TAM point for one second. A pretty common question that I get when talking to investors about the space is about the universe of addressable customers. And I think that a notion that I would say I don't necessarily agree with, but it comes up a lot from investors is, is a product like what you offer most applicable to big-brand advertisers that are very, very focused on brand safety, not appearing next to objectionable content, on brand advertising dollars not being lost. I guess how would you respond to that and think about the universe of addressable advertisers for IAS over time?

So when you take a look at our customer base and also where we see green space, yes, customer base is Fortune 500 large brands. A good portion of the solutions that we're providing are for branded advertisers. But when you see where the long runway is, it's mid-tier. So mid-tier tends to be more performance-based advertisers. We are very focused. In addition to cross-selling and upselling, our large advertisers go and get more mid-tier clients and have them adopting our solutions. We've invested heavily both on the front end in building out a mid-tier sales team, have go-to-market positioning in place on the back end, whether it be investing in automation, investing in product functionality and ensure that we're shifting towards more performance-based products, as I spoke to before, shifting to driving greater efficiency because all boats will rise. Both the brand advertisers will benefit from performance-based products as well as mid-tiers. So we're really excited about the adoption we're seeing with mid-tier clients and look forward to continuing to innovate on their behalf.

Excellent. Maybe we'll close just on the question about international. And you referred to this before. Obviously, a really, really important opportunity. Maybe talk to us about the progress you're making on the international footprint, your plans to double down on that in '24 and what trends you're seeing that maybe differentiate between markets. Because that's certainly something we're hearing in the ad markets more broadly, is about differences that are popping up based on pockets of economic strength in different places around the world.

Happy to take that one. So as I mentioned before, international is a big differentiator for IAS, and international really matters for our global brands. It starts first, I must say, with the product tech road map. It is so important that what we build and where we innovate is global and scalable and repeatable and the accuracy of our technology is the same and consistent worldwide. It's also really important that our products can run across all of the major tech platforms and we are able to offer language translation wherever brands want to run their digital media. So with that, when you take a look at our product and tech road map and where we are doubling down and seeing the accelerated growth, fits squarely in that area. TMQ is a perfect example where TikTok alone, we're running in 50 markets, 90 languages. And having the ability to leverage AI so that we can accelerate the product road map, accelerate the sophistication of the product and make that product and solution available wherever marketers are, I think, is a win-win for the customers, also the tech platforms and IAS.

Great. We're looking forward to seeing what's coming next. Thank you both so much for being here.

Yes. Thanks so much.

Thanks for having us.